Indian Rupee's Volatility Amid U.S. Tariff Uncertainty: A Strategic Trading Opportunity

The Indian rupee (INR) has entered a period of heightened volatility, driven by the U.S. court's May 2025 ruling on former President Trump's “Liberation Day” tariffs and the subsequent legal appeals. This article explores how the rupee's range-bound trading (84.80–86.00) and the transient dollar strength post-ruling create a compelling short-term trading opportunity. Investors can capitalize on these dynamics by leveraging non-deliverable forward (NDF) contracts and hedging strategies to navigate policy uncertainty.

The Legal Ruling: A Catalyst for Volatility

The U.S. Court of International Trade's decision to block Trump's tariffs—which sought to impose blanket duties on imports from nations with trade surpluses—initially sparked a sharp dollar rally. The USD/INR surged to an intraday high of 85.5075, as traders priced in reduced trade tensions and policy unpredictability. However, the Federal Circuit Court of Appeals swiftly issued a temporary stay, maintaining tariffs pending further review. This reversal caused the dollar to retreat to 99.30, stabilizing the rupee within the 84.78–85.70 corridor.

The unresolved legal battle has created a “no man's land” for traders:
- Transient Dollar Strength: The initial ruling's impact was short-lived, as markets discounted the possibility of prolonged tariffs.
- Policy Uncertainty: A prolonged appeal process could drag on for months, keeping the rupee trapped in its current range while investors await clarity.

Technical Analysis: Range-Bound Rupee Dynamics

The rupee's recent trading pattern reveals critical technical levels:
- Support at 84.78: A break below this level could open the door to a test of 84.00, driven by falling crude oil prices and RBI interventions.
- Resistance at 85.55: The 100-day EMA has acted as a ceiling, with traders eyeing 85.75 as the upper boundary of the range.

Analysts note that foreign institutional investor (FII) flows will amplify volatility. For instance, FII equity purchases of $542.6 million on May 28 contrasted with bond sales of $41.3 million on May 29, underscoring divergent sentiment. This mixed activity suggests that rupee volatility will persist until the tariff dispute is resolved.

Emerging Market Correlations: The Global Trade Ripple Effect

The rupee's volatility is not an isolated event. U.S. trade policy uncertainty is reverberating across emerging markets:
- Asia-Pacific Currencies: The Japanese yen and South Korean won have mirrored the rupee's range-bound behavior, as investors brace for geopolitical trade shifts.
- Crude Oil Dependency: India's reliance on oil imports means Brent crude prices (currently near $63.90/bbl) will remain a key driver of rupee movements.

Actionable Strategies for Investors

1. Non-Deliverable Forward (NDF) Contracts:
2. Execute a Short NDF Position: Capitalize on the rupee's potential appreciation if tariffs are permanently blocked. The current one-month NDF rate of 85.50 offers a leveraged play on range-bound volatility.

3. Hedge with Put Options: Use INR put options to protect against a sudden dollar rally if the appeals court reverses the ruling.

4. Sector-Specific Plays:

5. Export-Heavy Sectors: Indian pharma and textiles companies (e.g., Dr. Reddy's, Arvind Limited) stand to benefit if tariffs remain blocked, as reduced trade barriers boost U.S. market access.

6. Monitor FII Flows: Track FII equity purchases via the Nifty 50 Index for clues on investor sentiment.

7. Policy Risk Hedging:

8. Diversify with Emerging Market ETFs: The iShares MSCI Emerging Markets ETF (EEM) offers exposure to Asia-Pacific currencies, mitigating rupee-specific risks.
9. Stay Ahead of Fed Policy: A dovish Fed stance (as seen in the May FOMC minutes) will keep dollar demand muted, favoring rupee stability.

Backtest the performance of USD/INR when 'buy condition' is a dovish Fed FOMC statement and 'hold until' the next FOMC meeting, from 2020 to 2025.

Historical backtests reveal a stark reality: a strategy buying USD/INR on dovish Fed statements and holding until the next FOMC meeting underperformed catastrophically from 2020–2025, returning -64.60% versus a 99.02% benchmark gain. The -80.02% maximum drawdown and negative Sharpe ratio (-0.51) underscore the risks of relying solely on Fed dovishness. This reinforces the need for multi-factor hedging—such as NDF contracts and sector-specific exposure—to navigate Fed policy noise.

Conclusion: Seize the Range-Bound Opportunity

The Indian rupee's current volatility is a double-edged sword but presents a high-reward, low-risk window for traders. By combining NDF contracts, sector-specific equity bets, and Fed policy monitoring, investors can navigate the 84.80–86.00 range with precision. The unresolved tariff appeal ensures that the rupee's path will remain turbulent—but this uncertainty is precisely what creates asymmetric opportunities.

Act now: The rupee's next move could be swift.